Indifference Price (Reservation Price or Private Valuation)

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Written By
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Written By
Dan Buckley
Dan Buckley is an US-based trader, consultant, and part-time writer with a background in macroeconomics and mathematical finance. He trades and writes about a variety of asset classes, including equities, fixed income, commodities, currencies, and interest rates. As a writer, his goal is to explain trading and finance concepts in levels of detail that could appeal to a range of audiences, from novice traders to those with more experienced backgrounds.

Indifference Price, also known as Reservation Price or Private Valuation, refers to the specific price at which an individual is indifferent between buying or selling an asset, or between alternative investments.

It represents the threshold where the utility or satisfaction gained from holding or selling the asset is exactly equal.


Key Takeaways – Indifference Price

  • Personal Valuation Benchmark: Indifference price represents an individual’s specific valuation of an asset – balancing their willingness to buy or sell.
  • Decision-Making Reference: It serves as a reference point in negotiations, guiding an idea of acceptable transaction prices.
  • Risk and Preference Reflection: This price reflects personal risk tolerance and preferences. May differ from market value due to individual circumstances and perceptions.


Conceptual Foundations

Decision-Making Framework

Indifference Price is grounded in the theory of utility.

This posits that individuals make decisions based on the utility or satisfaction derived from different choices.

Utility Equilibrium

At the Indifference Price, the utility gained from either keeping or selling an asset is the same.

So, the individual has no clear preference for either action.


Determination of Indifference Price

Risk Preferences

An individual’s risk tolerance influences their Indifference Price.

Risk-averse investors might set a lower Indifference Price due to their preference for certainty.

Opportunity Cost

The Indifference Price considers the opportunity cost, which is the value of the best alternative forgone when a decision is made.

Market Conditions

Market dynamics and the expected future performance of an asset can also affect the Indifference Price.


Significance in Investment

Asset Valuation

Indifference Price is used in determining the value of an asset to an individual or entity.

This takes into account their unique preferences and circumstances.

Negotiation and Trade

In market transactions, understanding the Indifference Price helps in negotiations, as it represents the point beyond which a party would not be willing to trade.

Portfolio Management

For portfolio managers, determining the Indifference Price can help in decision-making regarding asset allocation and rebalancing.



Financial Markets

Traders and investors use the concept to determine at what price they would be willing to buy or sell a security.

Real Estate

In real estate, the Indifference Price helps sellers and buyers establish a price at which they are willing to sell or purchase a property.

Business Decisions

Companies use this concept to evaluate investment opportunities, divestitures, or mergers and acquisitions.



Personalized Valuation

The Indifference Price provides a personalized valuation of an asset.

This reflects an individual’s or entity’s specific circumstances and preferences.




The Indifference Price is subjective and can vary greatly among individuals or entities based on their risk tolerance and expectations.


It can change over time with alterations in market conditions, personal preferences, or financial goals.

Estimation Challenges

Accurately determining the Indifference Price can be challenging.

It requires an understanding of one’s preferences and the market environment.

May Not Fit

People may buy at one price and sell at another (bid-ask price).

For example, someone might be willing to buy a stock at $40 and sell at $50, but have no strong inclination at any price in between.



Indifference Price encapsulates the intersection of personal preferences, risk tolerance, and market dynamics in determining the threshold price for transactions or investment choices.

While providing a framework for rational decision-making, its subjective nature and dependence on individual circumstances underscore the need for careful consideration and analysis in its application.